Not Green Shoots Just Falling Leaves

While corporate earnings fell by some 38 percent in the first quarter, a dismal
performance by just about anyone's reckoning, Wall Street took heart that the
results were not as bad as the consensus estimates had predicted. Straws were
frantically grasped. Buoyed by the resulting talk of "green shoots" and the
hope of a relatively quick economic recovery, the Dow Jones Industrial Average
surged nearly 40% from its lows.

Since the crisis began, Wall Street cheerleaders and politicians have seized
on every scrap of data to support the notion that a recovery is imminent. When
such a mentality takes hold, just as happened in the dot-com bubble and the
real estate bubbles, the importance of actual earnings diminishes greatly.

Now, three months into our apparent recovery, corporations have continued
to issue somber sales outlooks, and insiders are heavy net sellers. When second
quarter corporate earnings are announced in July, they will confirm that an
economic recovery was likely a Wall Street pipe dream. Not surprisingly, springtime
optimism is fading and markets are falling back.

Already major official bodies, not renowned for their integrity in offering
politically depressing news, are gradually releasing uncomfortable economic
news. On June 22nd, the World Bank announced that global GDP would fall from
its previous forecast of negative 1.7 percent to negative 2.9 percent, a drop
of 70%.

On the same day, the White House belatedly announced that it expects the official
unemployment rate will reach 10 percent. Including all the unemployed and unwilling
part-time workers, this translates into an unofficial rate of some 20 percent.
The unemployment rate at the height of the 1930's depression was around 30
percent, just 50 percent higher than today.

Ivory tower economists have always believed that consumption is the key for
economic growth. With roughly 72 percent of U.S. GDP derived from consumption,
they argue that recovery will only come about from increased consumer spending.
Since unemployment and plummeting home and stock prices are hurting consumers,
the economists' solutions look to government to pick up the slack. With this
wayward hypothesis, the federal government has set about bailing out businesses
and directing money toward consumers in the form of "stimulus."

To some extent, this injection of trillions of dollars into the economy temporarily
contained the financial panic, leading some observers to declare, "Mission
Accomplished." However, the question remains as to whether we are experiencing
a true bull market or merely a bear market rally. To justify the case of a
bull market, it is necessary to buy into the consumer demand hypothesis. I,
on the other hand, believe that the disproportionate level of consumer spending
was only a symptom of an underlying disease.

The real problem was and is a long record of monetary and fiscal recklessness
by the federal government. This has allowed the natural economic equilibrium
to destabilize, and for consumption to become the dominant sector of our economy.
This kind of maladjustment is almost never seen as a problem, while it lasts.
If given the choice, most people would prefer to solely consume and not produce.
But as we all learn when we get our first credit cards, the fun stops when
the bill comes.

So, while the government's measures have contained acute financial panic in
the stock market, consumers remain in a state of shock and are deleveraging
fast. This is an expected result of people reacting reasonably to a darkening
economic landscape. To the economists, however, it will be seen as justification
for another, bigger "rescue plan." But the more the government intervenes,
the more asset prices are held artificially high, the longer it will ultimately
take for the needed restructuring to happen. The result will be a longer recession,
and perhaps a depression.

We feel that, fed on political and Wall Street hype, the current U.S. bear
market rally could last into July or August. It could even result in a Dow
of 10,000 before reality dawns and pulls it back down. I currently expect the
secular bear market to continue for another three years, most likely with a
series of bear market rallies and endless talk of "green shoots."

Despite the market noise, realists will focus on the growing evidence of depression
in America and expect U.S. markets to decline in real terms until perhaps 2012.
In the meantime, they may be reminded not of Wall Street's "green shoots" but
of the words of Johnny Mercer's song which ran, "... And soon I'll hear old
winter's song. But I'll miss you most of all, my darling, when autumn leaves
start to fall..."

For a more in-depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar, read Peter Schiff's newest
book "The Little Book of Bull Moves in Bear Markets." Click here to
order your copy now.

For a look back at how Peter predicted our current problems read the 2007
bestseller "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to
order a copy today.

John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.